July 16, 2008
The Slosh Theory
By Perry Willis

When the Federal Reserve creates new money and/or expands credit, where does this new purchasing power go first? Doesn't it look like it's been sloshing from one investment sector to another?

First the money and credit sloshed into the stock market, which boomed, and then there was a bust. Then it sloshed into the housing sector, which boomed, followed by a bust. Now it seems to be sloshing into commodities.

The great Austrian economist Ludwig von Mises taught that in the last stage of a monetary inflation people seek the safety of real assests, such as gold and other commodities. Doesn't that seem to be what's happening?

But where will the Fed money and credit slosh to next when the commodity bubble bursts? Larry Kudlow on CNBC keeps telling us the stock market will rebound if only the price of oil will fall. Kudlow thinks the price of oil would fall if only the Fed will raise interest rates and thereby make the dollar more valuable. A more valuable dollar would buy more oil. If Kudlow is right then we could find ourselves back where the string of booms and busts started, the stock market.

I offer this "slosh theory" only as an amusement for the perplexed, and not as a guide.

Filed under Wealth & Poverty
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